Tuesday, October 5, 2010

Credit Agricole's Mike Mayo's Meeting With Citigroup: Non-event (C)

The stock is up 11 cents at $4.14.
This was a publicity stunt. I'll stick with Rochdale's Dick Bove for actual analysis.
From DealBook:

...In the report, titled “Paradise lost; will it be found?” Mr. Mayo concludes that Citigroup is not likely to reclaim the “paradise” of its glory days, but “the meeting made us feel better about the high-level strategy and the potential to leverage its historical focus for global growth.”

No detail is too small for Mr. Mayo’s 41-page report. In one instance he takes issue with the fact that the Citigroup A.T.M.’s at 53rd and Lexington Avenue in Manhattan need an upgrade, a sign that the bank itself needs a bit of an upgrade.“The A.T.M.’s are inside the building, tough to find (no signs to point out) and wedged in a corner in a glass room between a vacant store and the stub end of a small newsstand. Moreover, the A.T.M. requires paper envelops for making deposits,” he writes. “In contrast, nearby Chase and Bank of America A.T.M.’S are more sophisticated and do not require the use of envelopes.”
Here is an extract from the report:

After our first meeting with Citigroup management (CEO and CFO) in almost two years, a key question is whether Citi can reclaim legacy Citicorp’s decent performance from the mid 1990s prior to the 1998 merger. Citi articulated a better strategy, especially with emerging markets and global transaction businesses, leading us to raise our target price to $4 (from $3.50). Yet, ongoing concerns about Citi’s ability to execute and its risk management lead us to maintain our Underperform rating.

The not so new “New Citi”
On the positive side, Citi looks to become like the “old Citi” in terms of a slimmed-down version that looks more like legacy Citicorp than the Citigroup of the past decade. On the negative side, we are not convinced that there has been enough improvement in risk management, a huge consideration for this reason: for each $3 that Citi made last decade, it gave back $1 due to poor risk management. Citi still seems to have aggressiveness with financial targets (well above historical), accounting (tax credits), and corporate governance. Also, the strategy does not always seem in sync with execution and/or financial reporting.

A history of mishaps and poor judgment
Citi mentioned that it has a new team. Yet, we’ve heard this before. Since 1998, Citi has had 30 major reorganizations or senior management changes, a disruptive lack of continuity that increases the chance for mishaps. Not surprisingly, over this same time Citi has had about 20 significant events that reflect breakdowns in risk management, ranging from fines and settlements for dealings with Enron and WorldCom to exceptional reserve builds and writedowns. All told, these events have added to over $100bn in pretax losses. Thus, the issue for Citi is less about squeezing out extra growth versus not messing up.

Underlying core franchise has its strengths
Citicorp ($1.5tn in assets; three-quarters of total as of 2Q10) includes the company’s three flagship businesses: securities and banking; global transaction processing; and consumer banking. Each benefits from Citi’s global reach, especially in Asia and other emerging markets where Citi maintains a longstanding, premium brand. Collectively, these areas give Citicorp a unique franchise in terms of breadth and depth if management can fix risk management. Citi Holdings ($0.5tn of non-core assets and businesses; declining towards $0.4 by year-end) should remain a drag on performance (diluting ROA).

A Citigroup spokeswoman responded to A.T.M. issue by saying, “Citi is currently piloting envelope-free A.T.M.’s, and a full-scale rollout will take place in 2011.”